Cheminvest Ltd. Vs. CIT- (Delhi High Court) [ Discussion on the Judgement]

Recently, the delhi High Court in the case of Cheminvest Ltd. Vs CIT held that in absence of any income claimed as exempt by the assessee, there cannot be any disallowance u/s 14A of the Act. Very said view was taken by The Hon'ble Gujarat High Court in the case of CIT vs Corrtech Energy (P) Ltd. reported in 372 ITR 97.   The facts of the case were that, the assesse was engaged in the business of making investment in shares and accepting/granting of loans. The Assessee was one of the co-promoters of Max India Ltd. The Assessee borrowed funds on which interest expenditure of Rs.1,21,03,367/- was incurred. The factual assertion of the Assessee was that in the relevant AY no dividend income was earned by the Appellant from the amount invested in various shares.For the AY in question, the Appellant filed a return of income declaring a loss of Rs.13,84,086/-. This case was picked up for scrutiny and the Assessing Officer (AO) completed the assessment under Section 143(3) of the Act disallowing Rs.97,87,570/- out of the total expenditure incurred during the year under Section 14A of the Act. The reason recorded by the AO for this disallowance was that the borrowed funds were utilized for the purpose of purchase of shares for the purpose to earn dividend income which is exempted under section 10(34) of the Act and thus, not forming a part of the total income, and therefore the paid thereon had to be disallowed under Section 14A.  

The CIT (A) by an order dated 27th September 2007 upheld the applicability of Section 14A of the. In the appeals before the ITAT, a Special Bench was constituted to decide the question regarding applicability of Section 14A of the Act in an year when no exempt income had been earned. The Special Bench by an order dated 5 th August 2009 answered the question by inter alia referring to the decision of the Supreme Court in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC). The Special Bench of the ITAT negatived the submission of the assesse.

The Assessee then filed an appeal against the above stated special bench decision befre Delhi High Court, wherein the following question of law was admitted :-

“Whether disallowance under Section 14A of the Act can be made in a year in which no exempt income has been earned or received by the Assessee?”

The court while determining the issue, observed that the complete answer to the above stated was provided by the very said Court in the case of CIT v. Holcim India (P) Ltd. (decision dated 5th September 2014 in ITA No. 486/2014). The Court then referred to the decision of Delhi High Court in the case of Maxopp Investment Ltd. (supra) and to the decision of the Special Bench of the ITAT in this very case i.e. Cheminvest Ltd. v. CIT (2009) 317 ITR 86. The Court also referred to three decisions of different High Courts which where in the above said substantial question law was admitted. The first was the decision in Commissioner of Income Tax, Faridabad v. M/s. Lakhani Marketing Incl. (decision dated 2nd April 2014 of the High Court of Punjab and Haryana in ITA No. 970/2008) which in turn referred to two earlier decisions of the same Court  in CIT v. Hero Cycles Limited [2010] 323 ITR 518 and CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204. The second was of the Gujarat High Court in Commissioner of Income Tax-I v. Corrtech Energy (P) Ltd  [2014] 223 Taxmann 130 (Guj.) and the third of the Allahabad High Court in Commissioner of Income Tax, Kanpur v. Shivam Motors (P) Ltd. (decision dated 5 th May 2014 in ITA No. 88/2014).  All the three decisions were passed after taking a view against the revenue and reiterated the position that when an Assessee had not earned any taxable income in the relevant AY in question “corresponding expenditure could not be worked out for disallowance.

The court then observed that in the case Rajendra Prasad Moody (supra), the Hon’ble Supreme Court explained that the expression "incurred for making or earning such income‟, did not mean that any income should in fact have been earned as a condition precedent for claiming the expenditure. The court further observed that s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure."

The court further observed that Section 14A of the Act on the other hand contains the expression “in relation to income which does not form part of the total income.‟ and accordingly the decision in the case of Rajendra Prasad Moody (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act. The Court held that that the expression “does not form part of the total income‟ in Section 14A of the Act, envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income.

In other words, the court after referring the Hon’ble Gujarat High Court’s decision in the case of CIT vs Corrtech 372 ITR 97 & other decisions as enumerated above, held that Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.